IPO Daily Report: Will software.net be an Inktomi or a NetGravity? 6-16-98

CBS.MarketWatch.com

NEW YORK (CBS.MW) -- The upcoming software.net IPO, expected to debut Wednesday, will be one that many Internet companies watch closely.

Beginning with the late January IPO from digital certificate developer VeriSign (VRSN)
VRSN, +1.81%
, Internet-related companies have provided some of the biggest fireworks in the 1998 new issue market. According to CommScan's EquiDesk, Internet-related deals at the end of last week had gained more than 30 percent above their offering prices, more than double the gains achieved by the IPO market as a whole.

Even as the fundamentals of the IPO market deteriorated last month, Internet-related deals such as the red-hot Inktomi (INKT)
inkt
offering remained among the few highlights. Inktomi shares were offered last week for the first time at 18; they now sell for 38.

The days of the Internet being a sure bet in the IPO market may be disappearing. After a strong first day of trading on May, Internet service provider Verio (VRIO)
vrio
has fallen well below its $23 offering price. And last week, advertising management software developer NetGravity (NETG)
netg
gained only 11 percent above a $9 offering price that came in at the low end of expectations. While far from a complete disaster, the NetGravity deal was a sign that not every deal painted with an Internet brush was guaranteed to soar.

Now along comes software.net, a computer software e-tailer and the first pure Internet commerce play since CyberShop (CYSP)
cysp
. How the San Jose, Calif.-based software.net performs could be of great importance to other Internet IPO hopefuls waiting in the wings, such as PointCast, GeoCities and software.net competitor Cyberian Outpost.

According to several analysts, software.net, which hopes to sell 5 million shares at $7 to $9 each, will do quite well, at least in the beginning. "The reception is going to be pretty good," said Mark Basham, new issue analyst with Standard & Poor's. IPO Value Monitor research director Ryan Jacob agreed. "This is going to be fairly well-received initially," said Jacob, who's also portfolio manager of The Internet Fund.

Jacob said the IPO will be boosted by the fact that software.net's chief executive was vice president of marketing at Amazon.com (AMZN)
AMZN, -0.40%
, one of 1997's hottest IPOs. Plus, software.net lead underwriter Deutsche Morgan Grenfell (which recently changed its name to Deutsche Bank Securities in the United States) also handled the Amazon deal. "They're going to play that for all its worth," Jacob said.

Neither Jacob nor Basham care much for software.net in the long-term. "Competition is intense and only going to get worse," said Basham, who also fears that software developers won't need a middleman like software.net to sell their products. "How is software.net going to be more effective at reaching out to users than IBM (IBM)
IBM, +0.35%
or Microsoft (MSFT)
MSFT, -0.59%
or whoever?"

Software.net, spun-off from electronic commerce service provider CyberSource last year, generated first-quarter revenue of $6.2 million vs. $3.2 million in the year-ago period. Forty-three percent of that revenue came from U.S. government agencies. Losses reached $2.2 million in the quarter compared to $169,000 in 1997, and the company expects those losses to increase "for the foreseeable future", due in part to multimillion dollar distribution agreements it recently signed with America Online (AOL)
aol
and Excite (XCIT)
xcit
.

At an $8 offering price, the company would be valued at about $204.5 million, not including outstanding options or debt. The company has also given its underwriters the option to sell an additional 750,000 shares if needed, a typical practice called the green shoe or over-allotment option.

Neff Corp. (NFF)
xcit
, an equipment rental company which recently went public at $14 a share, rose 11 percent on news that Morgan Stanley initiated the stock as a "strong buy." A $900 million merger between Neff competitors United Rentals (URI)
URI, -0.75%
and U.S. Rentals (USR)
USR, +9.56%
also boosted the beleaguered stock, which was as one that had been hit too hard because of overall tough conditions in the IPO market.

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